Tag Archives: secular stagnation

Apologies for my blogging hiatus: I’ve been otherwise engaged for the last few weeks in academic activities, some economics consulting and (most timing consuming of all) grassroots campaigning in the run-up to the UK general election.

I am not a natural ‘party political animal’, being too eclectic in my ideological views. Indeed, I like bits of each party manifesto but find other parts bonkers. Nonetheless, being back on home turf for an election for the first time in over 15 years, I wanted to get involved.

My own personal ‘wedge’ issues in this election were twofold: climate change (as would be expected from this blog) and anti-austerity. Climate change is still, to me, the central risk of our times. It has the potential to overturn everything within my children’s lifetime, not least of which is democracy itself. Unfortunately, neither climate change nor the environment in general feature in the top 10 concerns of the UK public (click for larger image):

Of the five main political parties that competed in the UK general election–the Conservatives, Labour, Lib-Dem, UKIP and Green–three have an aggressive commitment to act over climate change (Labour, Lib-Dem and Green). Unlike the Republican Party in the US, the Conservatives have in the past also had a forward-looking approach to carbon emission mitigation (as evidenced by their continued support of the UK’s Climate Change Act). The leadership, has, however, grown increasingly lukewarm over leading on the climate-change issue.

With regard to austerity, my stance is more nuanced. In short, why prioritise reducing debt at a time when interest rates on long-term government debt are at rock bottom levels? The following chart is taken from the Bank of England‘s latest “Inflation Report” published on the 13th May, Continue reading →

The most profound implications stem from demand-led secular stagnation. In particular, that the zero bound is a problem in delivering actual stimulus while bubbles may help deliver demand (and so may be part of the toolkit and landscape for long horizons) but their ultimate collapse further entrenches the core yield declines.

Which ties up with my chart from yesterday, highlighting the structural decline in interest rates. Business Insider describes the phenomenon this way:

In other words, secular stagnation puts forward the idea that interest rates at 0% might not be low enough to sufficiently stimulate an economy facing a demand shortage as stark as what some economists think we’ve been grappling with since the crisis.

Nonetheless, while Citi has produced a great infographic, there are a couple of glaring omissions–and both come on the supply side. First, they omit the hypothesis that technology-driven productivity growth is suffering from diminishing returns. This is the thesis of the growth economist Bob Gordon, which I have blogged about frequently, including here and here.

Second, biophysical constraints are nowhere to be seen. Biophysical constraints come in a variety of forms from the very concrete, like resource depletion, to the more complex like biodiversity loss and the spending of carbon budgets. I will put the latter to one side as it is not at all clear that they are a significant cause of the current phase of secular stagnation (although they most certainly will be causing secular stagnation, or even worse, as the century progresses).

Resource constraints do, however, provide a smoking gun for the Great Recession since all manner of energy and raw material prices were spiking before the credit crisis hit.

But doesn’t the current slump in oil, copper and iron prices remove raw materials from the secular argument? Only if the slump in prices continues and economic growth is restored. This would allow us to disentangle the supply and demand side. In short, low current prices could be a reflection of anaemic demand, which fits into the top half of the Citi chart above.

Alternatively, what we could be seeing is a ratcheting up in raw material prices over an extended period of time. Natural resource depletion leads to higher prices, which in turn leads to a spur to innovation (think fracking). However, prices do not return to their former, inflation-adjusted levels. Depletion then continues to the point that it overwhelms the current technology gains, leading to another jump in prices. This then prompts new innovation, but again only sufficient to cause a temporary retreat in prices not a permanent lowering.

So the ratchet does have short downward phases, but these are purely punctuation marks within the long-term upward trend. Is this what we are seeing? We just don’t know, but this hypothesis is consistent with the pattern of prices since the 1990s.

Going back to the central concern, secular stagnation is a wider threat to our socio-political systems, which are entirely premised on economic growth. Our democratic institutions are founded on a two hundred year phase of rising living standards based on cheap energy and technological innovation. If living standards stop rising and innovation slows, then a lot of other things will change as well.

Like this:

I’m taking my charts today from the just-published Report of the Commission on Inclusive Prosperity, chaired by Larry Summers and Ed Balls. Summers, one of the highest profile economists in the world, was in London yesterday (on the way to Davos), promoting the report itself and describing the challenge of how to combat secular stagnation. Yesterday, I listened to Summers at a lecture held at the LSE, a podcast of which can be found here.

First, a restatement of the problem. Growth has slowed in almost all advanced countries (click for larger image):

And what growth there has been has gone to the rich:

In short, for the bottom 90%, productivity and income have diverged.

While admitting there are supply side factors causing the economic slowdown (such as poor demographics), Summers places most emphasis on the demand side as the root cause of the problem, particularly with repsct to investment.

Critically, the relative price of investment goods has collapsed, making investment a meagre source of effective demand. By way of example, Summers points to the behemoth of the 1970s, IBM. The computer giant of its time had a repeated need to access capital markets in order to finance its investment plans and grow. Apple, however, generates more cash than it knows what to do with. Indeed, it is a source of liquidity in the capital markets through carrying out continued share buybacks.

Similarly, Summers notes that a company used to be partly valued on how much ‘stuff’ it had on its balance sheet, but now this is almost an irrelevance. So we have a situation where Whatsapp is worth $17 billion, with minimum assets and employees, but Sony, with an army of employees and a raft of factories, is only worth $16 billion. As a result, the price of money has fallen to zero.

Summer’s prescription: if the private sector doesn’t want to invest regardless of how low interest rates go, the state should step in, taking advantage of bargain basement borrowing rates to massively upgrade its infrastructure.

I am broadly sympathetic. However, I would point out that another state suffering secular stagnation, Japan, has tried the government-financed mega infrastructure investment strategy before. Indeed, for a time, academics dubbed Japan the ‘construction state’. This frenetic activity, however, did little to raise long-term growth rates. Sometimes, when growth has gone, it’s gone.